When the National Basketball Association and Debtors of Diamond Sports Group reached an agreement to relinquish media rights back to the league following the 2023-24 season, it was incumbent on the assumption or rejection of a management services agreement (MSA). The outcome on the resolution pertaining to the MSA will impact the cooperation agreement between Diamond and its stakeholders. Diamond Sports Group also sued Sinclair, Inc. under its Ch. 11 bankruptcy case, claiming that its parent company received nearly $1.5 billion as a result of misconduct. Ahead of a hearing on the matter that is scheduled to take place on Friday, Dec. 15, 2023, there have been motions filed from several vested parties about expeditiously reaching a resolution.
At the moment, Sinclair is providing Diamond Sports Group with services that the indirect wholly-owned subsidiary needs to function and carry out advertising sales, broadcasts and programming. Earlier in the month, the Official Committee of Unsecured Creditors of Diamond Sports Group filed a joinder affirming that the harm the company alleges to have suffered “is entirely illusory.”
Moreover, it conveys that the existing MSA is relying on a provision of a letter agreement amendment instituted on March 1, 2022, which reinstates original MSA fees upon a bankruptcy filing from Diamond Sports Group. The Debtors have argued that this provision falls under an ipso facto clause within the bankruptcy code, meaning that the absence of harm to Sinclair renders the motion fatal.
In its response, Sinclair communicated to the court that it is suffering harm because Diamond Sports Group has yet to pay about $7.5 million per month in deferred fees under the management services agreement since the petition date, which equates to approximately $80 million. These unpaid fees will remain as such if the company is granted approval to enter into the cooperation agreement with its creditors, according to Sinclair. The company also declares that Diamond has looked to separate from Sinclair since “day one,” yet the implementation of such has failed and allowed the regional sports network holder to receive the benefits of the MSA at a diminished rate.
“The quid pro quo for a debtor (normally) having until confirmation to decide whether to assume or reject an executory contract is premised on the fact that the counterparty is at a minimum being paid currently on a post-petition basis,” Sinclair said in the reply. “If the counterparty is not being paid postpetition, then the counterparty is essentially funding the estate with no assurance of ever being paid.”
Under the assertion that the management services agreement and deferral letter “are a single, unitary agreement,” Sinclair points out that the argument fails on two different levels. The deferral letter, which states that if Diamond files for bankruptcy, Sinclair will receive full payment of fees provided to Diamond during the case, is not an executory contract itself; therefore, the ipso facto prohibitions do not apply, nor does the deferral itself. If the deferral were to withal remain in effect, it does not represent a contract but rather a deferral itself.
“Thus, the full amounts due under the MSA are still accruing as administrative expenses that must be paid now or in the near future,” Sinclair said. “But the Debtors have shown no indication of ever paying these amounts, and their financial projections attached to the Cooperation Agreement show no such payments ever. The Debtors’ non-payment of the deferred fees and apparent lack of intent to ever pay them demonstrates clear prejudice to Sinclair.”
When Major League Baseball and its teams looked for immediate payment for local broadcast fees, Sinclair averred that the court recognized the contract rate is reasonable unless there is convincing evidence otherwise. The company seeks to underscore this instance as an example to how a debtor cannot short-pay executory contract counterparties pending the assumption or rejection of contract. Under U.S. bankruptcy code, the amount owed is defined as the “reasonable value of those services,” parlance introduced in National Labor Relations Board v. Bildisco & Bildisco (1984).
The disputation between the league and Diamond preceded the selective rejection of the contract of the Arizona Diamondbacks. Earlier in the year, it had relinquished media rights for the San Diego Padres, the first such MLB team to lose its local media provider under the bankruptcy declaration.
Prior to the season, Major League Baseball instituted a local media department to broadcast, disseminate and sell advertising for these broadcasts and has since expanded the business interest to ensure teams stay on the air. Additionally, the league provided at least 80% remuneration to afflicted teams in order to retain competitive balance, although the adoption and execution thereof next season is unknown.
After previously asserting that “time is up,” Major League Baseball introduced a jointly administered reply with the Atlanta Braves, Cleveland Guardians, Detroit Tigers, Milwaukee Brewers, Texas Rangers and associated affiliates compelling the court to coerce the Debtors into immediately assuming or rejecting telecast rights agreements. These entities previously filed a motion when there was no ostensible path towards a Ch. 11 plan, something it argues remains the case today.
“To suggest that MLB or the Clubs would be ‘content,’ let alone willing, to endure such uncertainty into the 2024 season is misleading at best, and they should not be forced to endure another season in limbo,” the league said in the filing. “The assumption of operations for up to 12 additional Clubs shortly before or during the course of the 2024 season would present challenges of an entirely different magnitude.”
The filing highlights that within the terms of a transition of the business reached among the Debtors, it will continue to operate rights agreements with certain clubs through at least the 2024 MLB season. Franchises within the 12 remaining on Bally Sports-branded regional sports networks have yet to be defined, which has had residual effects on spending during the offseason.
Furthermore, all but one of the 12 teams have contracts that are set to run beyond the 2024 MLB season unless the cooperation agreement is approved. Under the cooperation agreement, there are conditions that will determine its effectiveness, which includes the resolution of the motion with MLB and Sinclair along with a deal with the National Hockey League.
“The Debtors represented to this Court that a deal with the NHL was forthcoming and that they were ‘hopefully putting that before the Court shortly,’” MLB recollected, which took place on Nov. 15, 2023. “That was nearly a month ago. No motion has been filed with respect [to] the NHL. There is no settlement with Sinclair. There is no settlement with the Clubs or MLB. How then, can the Debtors suggest that such a highly contingent ‘orderly transition’ should moot the Motion?”
Due to the factors therein, MLB has stated in its objection that the Debtors need to be prepared to assume or reject the Telecast Rights Agreements on or before Dec. 31, 2023. As the season approaches closer, the league is unnerved about the potential for continuing to remain in the paradigm devoid of a resolution, thus producing augmented levels of uncertainty.
“The Debtors have always been just ‘one step’ away from a breakthrough, where everything is hopefully forthcoming soon,” MLB wrote in the filing. “Meanwhile there is a real risk that MLB and the Clubs will reach the start of the 2024 season in the same position, with the same uncertainty, and no resolution in sight. Enough is enough.”
